Investors are keeping a close eye on the Federal Reserve’s moves regarding US interest rates. Many believe rates will remain unchanged at the end of January, but some are hoping for two cuts of 0.25 percentage points by year’s end. Upcoming inflation data could shift these expectations.
Economists surveyed by Bloomberg predict that the annual inflation rate stayed steady at 2.7% in December. The core inflation rate, which excludes food and energy prices, might tick up from 2.6% in November to 2.7%. Last November, inflation dropped more than anticipated, but analysts cautioned that the data could be misleading due to gaps caused by last year’s government shutdown. Some experts argue that we could see inflation rise unexpectedly in December as the effects of that shutdown fade.
This situation is crucial for the Federal Reserve. Last year, the bank reduced borrowing costs to their lowest in three years, despite internal disagreements about inflation risks. Steve Englander, who heads FX research at Standard Chartered, noted, “We have pointed out several scenarios where US rates could rise significantly because of macro factors.” He added that the biggest concern is whether inflation decreases as expected.
Meanwhile, China is about to release its December trade data, which wraps up a year marked by a record trade surplus. Bloomberg economists forecast a December surplus of $114 billion, bringing China’s total surplus for 2025 to nearly $1.2 trillion, its highest ever.
China’s exports are driving its growth as domestic demand suffers. The Rhodium Group estimates that net exports contributed 1.7% to China’s GDP last year. However, China’s booming exports are causing trade tensions globally. Developing countries like Turkey, Brazil, and India are increasingly investigating unfair trade practices against China, showing reluctance to absorb its excess production.
Concerns are also brewing about China’s currency, which many believe is undervalued, giving its exports an extra edge. Although the renminbi rose 4.4% against a struggling dollar last year, it has lost around 15% in value against the currencies of its trading partners since 2022, according to the Bank for International Settlements. Many economists are now calling for the renminbi to strengthen in order to create a more balanced trading environment.
Despite these tensions, analysts at Goldman Sachs expect China’s trade surplus to keep growing due to increasing high-tech manufacturing exports and a government push for self-sufficiency.
In the UK, the economy is grappling with high borrowing costs and rising taxes. Upcoming GDP figures for November will provide insights into its current state. Economists forecast a slight growth of just 0.1% after two months of contractions. Though manufacturing is bouncing back, thanks to companies like Jaguar Land Rover recovering from production issues, the five-day strike by resident doctors may dampen growth.
Official reports show a decrease in retail sales and increasing rumors about tax hikes have shaken both business and consumer confidence. Chancellor Rachel Reeves confirmed a £26 billion tax increase, raising the overall tax burden to 38% of GDP.
The Bank of England has signaled a bleak outlook, expecting no growth in the fourth quarter of 2025, a stark contrast to stronger growth seen earlier. This slow momentum played a part in their decision to cut interest rates to 3.75%. Markets are anticipating one or even two more quarter-point cuts this year.
Rate setter Dave Ramsden pointed out that the lack of consumer confidence and ongoing fiscal tightening are contributing to a sluggish growth outlook, despite some certainty provided by the Budget announcement.
